What to know about acquiring a new versus an existing franchise
F. Georges Sayegh, A.S.D., C. Adm., Fellow CMC of Quebec and Ontario, is an expert- consultant in franchising and technology transfer. He is also the author of 18 books on franchising and related businesses. To reach him: gsayegh@gsayegh.com; Tel: (514) 216-8458.
Hundreds of new concepts appear and disappear every day, leaving prospective investors questioning whether to acquire a new franchise or an existing one. This article outlines the benefits and drawbacks of both.
A few aspects of franchising are similar no matter whether the investor has decided to go with a new or an existing franchise.
Brand recognition
Both methods offer their franchises brand recognition and a customer base. The potential franchisee benefits from a strong proven economic system as well as the support and customer loyalty associated with the franchise infrastructure.
1. Knowledge
Both methods offer the benefit of the franchisor’s experience and wisdom. His experience and knowledge are transferred to the franchisee whether he is opening a new franchise or transferring its operations. The franchisee benefits from profound business experience in both cases. This could be in the form of negotiating a new lease, setting up a new location, supplying criteria to ensure proper market location, establishing or implementing the opening inventory, setting up the appropriate equipment, training the franchisee and his principal staff, or assisting in opening the establishment.
2. Procurement
Both methods provide the potential franchisee an existing list of suppliers that have been previously negotiated, thus minimizing the burden of setting up a system from the ground up.
3. Training staff
Finally, both methods offer already well-established training programs to the franchisee and his staff.
So, what makes the difference between starting a new franchise or acquiring an existing one? The following information will help the prospective franchisee come to a decision.
Advantages of starting a new franchise
1. No previous experience necessary
Acquiring a new franchise requires no prior experience since the franchisor will train the franchisee in all aspects of the concept: administrative, financial, human resources, and inventory management, to name but a few.
2. Initial cost
The entry fees and setup costs of starting a new franchise are typically lower than those associated with buying an existing business. The potential franchisee hires professionals to analyze a profile search to find a corresponding franchisor, negotiate the signing of the franchise agreement, or prepare the financial forecasts estimating the financial needs to start the business.
3. Franchisor support
The franchisor provides robust training and setup support for the new franchisee and his staff.
4. Brand momentum
During the launch of a new concept, some prospective franchisees benefit from reduced costs for the initial franchise fee and training programs, or they may receive other benefits that later franchisees do not.
5. Opportunity for growth
Starting fresh allows the prospective franchisee to select a prime location and grow within the business by acquiring the opportunity for a multi-location agreement.
6. Customization
The potential franchisee benefits from best practices and may be able to establish its own culture from scratch instead of following the franchisor’s previously established rules and regulations.
Disadvantages of a new franchise
1. Risk
The prospective franchisee does not necessarily have a history to assess the viability of the specific market where he intends to open an establishment.
2. Customer base
Building a clientele from the ground up demands a great effort on the part of the franchisee who may not have the background and experience if it is not offered by the franchisor or his staff.
3. Profits
Generating profits might take longer than expected to attain the break-even point of profitability until the business is established.
4. Marketing efforts
Potential franchisees might need to invest heavily in local marketing to attract new clients that may not be aware of the existence of their business.
5. Learning curve
A new franchisee may face a steep learning curve in understanding the concept and how to operate a profitable business.
Acquiring an existing establishment
Advantages
1. Evaluation of the business
The new investor can ask either his CPA, Certified Management Consultant, or a Chartered Business Valuator (CBV) to evaluate the operations of the existing business.
2. Business model
The potential franchisee will benefit from the existing clientele, established suppliers, operational systems, and existing staff, thereby minimizing the need to set everything up from scratch.
3. Proven model
The potential franchisee benefits from an attested track record, reducing the risk of failure of starting a new business.
Disadvantages
1. Acquisition cost
Acquiring an established franchise often requires a larger initial investment: hiring a CPA to analyze the vendor’s financial statements, bringing in a Certified Management Consultant to prepare a questionnaire to investigate the franchisor, hiring a Chartered Business Valuator to evaluate the business itself, and paying goodwill which he wouldn’t need to do if it was a new business. These costs are all in addition to the transfer and training costs that the franchisor might ask for.
2. Inherited issues
The real reason why the seller wanted to sell could be due to a variety of situations that may range from matrimonial problems, communication problems with the franchisor, or issues with staff members which are not necessarily known before the acquisition is completed.
3. Rigidity
The new franchisee has to abide by the franchisor’s established rules and regulations which may have been much more flexible at the inception of the concept.
4. Upgrades
The franchisor may require that the establishment be upgraded to meet the current standards of the overall appearance of the business.
In conclusion, either alternative requires the franchisor’s approval of the prospective franchisee. For the franchisee, this means submitting financials and other background information in order to demonstrate that he can afford to run the business according to the franchisor’s rules and regulations and fully meet all the requirements imposed on a new franchise.